Annuity questions: Provide answers before anyone even asks, Pt. I

By Ryan Parker

Bankers Annuity Brokerage


It's not enough for your client to seem to understand all the details of their annuity. You want to know they understand.

As an annuity professional, you should be more than familiar with the exercise. After thoroughly investigating your client's financial circumstances, needs and goals, you've decided to recommend an annuity. You've already discussed the product and why it's a smart addition to your client's portfolio at length, and it's been a positive, collaborative effort. You've covered the ins and outs of your annuity offering extensively, presented illustrations and provided them with all the requisite and supporting literature you can, and your client seems to understand precisely what they're buying.

But in this industry, although you may well have crafted an annuity that provides your client with an income they cannot outlive, a principal they cannot lose, and even the opportunity to enjoy interest rate growth that beat many bonds and CDs, it's not enough for your client to “seem to understand” all the details of their annuity. You want to know they understand.

Unfortunately, there's always the chance that despite your best intentions and efforts, despite your thoughtful recommendation and suitable sale, a major misunderstanding may still occur.

One way to counter this potentiality is to put yourself in your client's shoes and use your professional expertise to consider the questions every annuity buyer should ask before writing the check. You already know the answers, so why not verify that your client knows them too?

Ask them the following questions and carefully gauge their response — odds are you'll need to fill in some gaps to ensure they comprehend all the details and tactics that support the big-picture annuity strategy. After all, it's a great deal of information for the average layperson to absorb, and the prospectus you gave them is anything but a riveting read — despite their best intentions.

What type of annuity are you buying?

Your client must be able to respond to this question confidently. Ask them which investment class of annuity they're buying — either fixed, fixed indexed or variable — and what that means as far as risk and reward.

Also ask them what type of payout option they've chosen. This should be an easy answer, but you'll never know if your client is laboring under a severe misunderstanding if you don't ask. There is, after all, a considerable difference between immediate and deferred annuities.

Who is the issuing company, and why and how do you keep up with its financial ratings?

While your client should be able to tell you who they're buying the annuity from with ease, they might stumble a bit when it comes to understanding the importance of ratings. Explain why you've chosen a company with nothing less than an AM Best rating of “A,” and go on to remind them that you've chosen a provider with a strong financial rating from a number of agencies, as the financial stability of the insurer dictates the security of their annuity.

Have them write down the names and Web addresses for all the rating agencies you used to make your decision, including Moody's, Fitch, Standard and Poor's, and of course, AM Best. Also have them jot down how each agency ranks outstanding insurers.

How long is your annuity's surrender period?

Your client is cognizant of the fact that annuities are long-term retirement tools, but do they also understand the impact of their surrender period? Clearly reiterate not only the length of their surrender period, but also the fact that taking early withdrawals comes with penalties — penalties that can have a significant impact on the annuity.

While you would never sell a product with an inappropriate surrender period, when it comes to this crucial length of time, client and advisor must both be on precisely the same page.

Keep an eye out for part two, where we shift the questions to the all-important topic of fees, penalties and commissions.